ANNUAL REPORT AND FINANCIAL STATEMENTS 2019 HEATHROW AIRPORT LIMITED ANNUAL REPORT AND ACCOUNTS COMPANY REGISTRATION NUMBER: 01991017 OUR PURPOSE TO MAKE EVERY JOURNEY BETTER OUR VISION TO GIVE PASSENGERS THE BEST AIRPORT SERVICE IN THE WORLD STRATEGIC REPORT STRATEGIC At a glance 6 Our approach to taxation 58 Key financial and operational indicators 8 Our approach to risk management 60 History of Heathrow 10 Our principal risks 62 Our business 12 Task force on climate related financial disclosures 64 Operating review 18 Section 172 (1) statement 72 Our strategy 22 Our commitment to sustainable growth 30 Financial review 48 Our approach to capital allocation 56 GOVERNANCE REPORT GOVERNANCE Group structure 78 Audit Committee 94 HAHL Board of Directors 80 Remuneration Committee 98 Executive Committee 84 Nominations Committee 104 Corporate governance 86 Finance Committee 105 Chairman’s introduction 86 Sustainability and Operational Risk Committee 106 Governance structure 88 Directors’ report 108 Roles and responsibilities 90 Directors’ responsibilities 111 Composition of the HAHL Board and its committees 91 2019 HAHL Board activities 92 Effectiveness 93 FINANCIAL STATEMENTS FINANCIAL Independent auditor’s report 114 Income statement 116 Statement of comprehensive income 117 Statement of financial position 118 Statement of changes in equity 119 Accounting policies 120 Significant accounting judgements and estimates 131 Notes to the Company financial statements 133 Additional unaudited information 154 SECTION 01 STRATEGIC REPORT At a glance 6 Key financial and operational indicators 8 History of Heathrow 10 Our business 12 Operating review 18 Our strategy 22 Our commitment to sustainable growth 30 Financial review 48 Our approach to capital allocation 56 Our approach to taxation 58 Our approach to risk management 60 Our principal risks 62 Task force on climate related financial disclosures 64 Section 172 (1) statement 72 4 ANNUAL REPORT AND ACCOUNTS 2019 ANNUAL REPORT AND ACCOUNTS 2019 5 AT A GLANCE Heathrow flies into the 2020s having landed nine consecutive years of growth Heathrow soared to the best year in its history welcoming a record 80.9 million passengers in 2019 (+1% vs 2018). The share of UK exports handled through Heathrow increased to 40%, strengthening our position as the UK’s biggest port. New investments and cutting-edge technology boost passenger experience Visitors to the UK have received a first-class welcome following Heathrow’s investment of over £12 billion in private money to boost the experience – including building Terminal 2 and rolling out e-Gates, enhanced security scanners and a new digital tower. Skytrax 80.9m crowned Heathrow’s terminals as world’s best seven times in the last ten years, with 82% of (+1.0%) passengers passengers rating Heathrow as “Excellent” or “Ver y Good”. 6 ANNUAL REPORT AND ACCOUNTS 2019 STRATEGIC REPORT STRATEGIC Healthy financial Expansion of Heathrow GOVERNANCE REPORT GOVERNANCE performance On 27 February 2020, the Court of Appeal concluded that the Government was required but failed to take Heathrow remains in strong financial health: revenues account the Paris Climate Agreement when preparing climbed 3.5% to £3.0 billion on the back of increased the Airports National Policy Statement (‘ANPS’). The demand to fly – supporting an additional £856 million Court declared that the ANPS has no legal effect unless of investment into the airport in 2019. Adjusted EBITDA and until the Government carries out a review of the rose 2.0% to £1.8 billion. Remaining competitive in the policy. The Government declined to appeal to the lead-up to expansion continues to be a priority: strict Supreme Court directly, but Heathrow and other operating cost discipline while prioritising service, interested parties have applied for permission to operational resilience and investment in growth has appeal the Court of Appeal ruling. The timing of this driven adjusted costs per passenger pre IFRS 16 up decision, given the current COVID-19 environment, is 5.0% to £14.19. uncertain at this time. FINANCIAL STATEMENTS FINANCIAL Heathrow eyes zero-carbon future after starting 2020s on carbon-neutral footing In January, Heathrow became carbon-neutral and started working towards operating zero-carbon airport infrastructure by the mid-2030s. It remains clear that unless expansion meets strict environmental targets, no additional capacity can or will be used. ANNUAL REPORT AND ACCOUNTS 2019 7 KEY FINANCIAL INDICATORS REVENUE 2019 2,976 £2,976m 2018 2,874 Revenue is an indicator of Heathrow’s top-line growth. It consists 2017 2,828 of aeronautical income, which is generated from fees charged to airlines for use of the airport’s facilities, and retail and other income from a variety of other sources. Passenger growth continued to contribute to increases in revenue which grew 3.5% in the year. 1 ADJUSTED EBITDA 2019 1,828 £1,828m 2018 1,792 Adjusted EBITDA is an indicator of how Heathrow is delivering top-line 2017 1,752 revenue growth while remaining efficient and controlling operating costs. Adjusted EBITDA is profit before interest, taxation, depreciation, amortisation and fair value gains and losses on investment properties. A focus on efficiency combined with revenue growth resulted in adjusted EBITDA growth of 2.0%. PROFIT BEFORE TAX 2019 819 £819m 2018 602 Profit before tax is a measure of total return generated before 2017 804 taxation. Profit before tax grew by 36.0% in the year. Profit before tax includes non-cash fair value movements on investment properties and financial instruments. These movements can cause significant fluctuations year on year. 1 REGULATORY ASSET BASE 2019 16,598 £16,598m 2018 16,200 The Regulatory Asset Base (RAB) is a regulatory construct, based on 2017 15,786 predetermined principles not based on IFRS2. It represents the capital invested in Heathrow for which we earn a regulated return. By investing efficiently in our airport, and constructively engaging with airlines, we add to our RAB over the long-term and this in turn contributes to delivering shareholder value. Heathrow continues to invest in its operations and the RAB increased 2.5% in the year. 8 ANNUAL REPORT AND ACCOUNTS 2019 KEY OPERATIONAL REPORT STRATEGIC INDICATORS PASSENGERS 2019 80.9 80.9m 2018 80.1 The sum of all arriving and departing passengers. 2017 78.0 To beat our plan, we aim to maximise the number of passengers we serve in a year while providing best possible service. We welcomed a record 80.9 million passengers travelling through the UK’s only hub airport, up 1.0% on last year. PASSENGER SATISFACTION 2019 4.17 4.17 2018 4.15 An independent passenger satisfaction survey that compares 2017 4.16 REPORT GOVERNANCE Heathrow’s performance against 350 airports worldwide. Passengers rate their experience with a score out of 5.00, where one is ‘poor’ and five is ‘excellent’. Our vision is to give passengers the best airport service in the world. We achieved a record high level of passenger satisfaction in 2019. DEPARTURE PUNCTUALITY 2019 78.5% 78.5% 2018 77.6% The number of flights that depart from their stand within 15 minutes of 2017 80.2% the scheduled time. Departure punctuality improved to 78.5% in the current year, contributing to our plan to transform customer service. BAGGAGE CONNECTION 2019 99.0% 99.0% 2018 98.8% To improve service for every 1,000 passengers (direct and connecting) we 2017 99.0% measure the percentage who successfully travelled with their bags on the same flight. We put a great passenger experience at the heart of what we STATEMENTS FINANCIAL do; our operational ambition is ‘every passenger, every bag, every time’. 99.0% of bags successfully connected in the current year. LOST-TIME INJURIES 2019 0.34 0.34 2018 0.33 We measure the number of lost-time injuries for every 100,000 hours 2017 0.48 worked in the last 12 months. In their working life a person works an average of 100,000 hours. We want everyone at Heathrow to go home safe and well to their loved ones at the end of each day. Lost time from injuries was broadly stable in 2019 at 0.34. 1 Alternative Performance Measures (APMs): the performance of the Company is assessed using a number of APMs. Management believe the APMs provides investors with an understanding of the underlying performance of the Company, while recognising that information on these additional items is available within the financial statements should the reader wish to refer to them. APMs are discussed in detail and defined on page 154 of the financial statements. 2 There is no GAAP difference between International Financial Reporting Standards (IFRS) and Financial Reporting Standard 102 (FRS102). ANNUAL REPORT AND ACCOUNTS 2019 9 HISTORY OF HEATHROW For over 70 years, we have been an Work demolishing Heath Row and clearing land for the runways started in 1944. However, by the time the war had integral part of the UK and its history. ended the RAF no longer needed another aerodrome and it was officially handed over to the Air Ministry as London’s new From a private airfield to one of the civil airport on 1 January 1946. The first aircraft to take off from Heathrow was a converted Lancaster bomber called world’s busiest international hub Starlight that flew to Buenos Aires. airports, a lot has changed in that time. The early passenger terminals were ex-military marquees which formed a tented village along the Bath Road. To reach In 1930, British aero engineer and aircraft builder Richard aircraft parked on the apron, passengers walked over wooden Fairey paid the Vicar of Harmondsworth £15,000 for a duckboards to protect their footwear from the muddy airfield. 150-acre plot to build a private airport to assemble and There was no heating in the marquees, which meant that test aircraft.